Northwestern Indiana Telephone Company - Page 54

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                        It is important to emphasize that we are concerned                             
                  here with a tax on "accumulated taxable income," � 531,                              
                  and that the tax attaches only when a corporation has                                
                  permitted "earnings and profits to accumulate instead                                
                  of being divided or distributed," � 532(a).  What is                                 
                  essential is that there be "income" and "earnings and                                
                  profits."  This at once eliminates, from the measure of                              
                  the tax itself, any unrealized appreciation in the                                   
                  value of the taxpayer's portfolio securities over cost,                              
                  for any such unrealized appreciation does not enter                                  
                  into the computation of the corporation's "income" and                               
                  "earnings and profits."                                                              
                        The corporation's readily marketable portfolio                                 
                  securities and their unrealized appreciation,                                        
                  nonetheless, are of profound importance in making the                                
                  entirely discrete determination whether the corporation                              
                  has permitted, what, concededly, are earnings and                                    
                  profits to accumulate beyond its reasonable business                                 
                  needs.  If the securities, as here, are readily                                      
                  available as liquid assets, then the recognized                                      
                  earnings and profits that have been accumulated may                                  
                  well have been unnecessarily accumulated, so far as the                              
                  reasonable needs of the business are concerned.  * * *                               
                  Upon this analysis, not only is such accumulation as                                 
                  has taken place important, but the liquidity otherwise                               
                  available to the corporation is highly significant.  In                              
                  any event--and we repeat--the tax is directed at the                                 
                  accumulated taxable income and at earnings and profits.                              
                  The tax itself is not directed at the unrealized                                     
                  appreciation of the liquid assets in the securities                                  
                  portfolio.  The latter becomes important only in                                     
                  measuring reasonableness of accumulation of the                                      
                  earnings and profits that otherwise independently                                    
                  exist.  What we look at, then, in order to determine                                 
                  its reasonableness or unreasonableness, in the light of                              
                  the needs of the business, is any failure on the part                                
                  of the corporation to distribute the earnings and                                    
                  profits it has.                                                                      

            Ivan Allen Co. v. United States, 422 U.S. at 627-628.                                      

                  What is required, then, is a comparison of accumulated                               
                  earnings and profits with "the reasonable needs of the                               
                  business."  Business needs are critical.  And need,                                  




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Last modified: May 25, 2011